A panel of experts on an online Meet the Money webinar explain the current state of CMBS loan special servicing during the downturn and what that means for hotel owners.
REPORT FROM THE U.S.—The loss of guest demand is hurting the hotel industry, and while revenue isn’t what it used to be, owners still have bills to pay, particularly debt service.
With states delaying or reversing course on reopening and corporate and group demand significantly down, hotel owners are working with their lenders for some help on their loans.
It’s estimated that more than 20% of all hotels in the U.S. have commercial mortgage-backed securities debt, said Jim Butler, founding partner at Jeffer Mangels Butler & Mitchell, during his firm’s Meet the Money virtual roundtable titled “CMBS special servicing FAQs.” Ironically, hotels also have the highest delinquency and default ratio in this debt type, making up 20% with retail behind them at 18%, he said.
This has garnered a great deal of attention on the CMBS debt market, with many articles critical of CMBS loans and their servicers, he said.
Clearing things up
Generally, it will be more difficult dealing with a CMBS special servicer than with a bank, said Curt Spaugh, director in the special servicing division at SitusAMC. With a bank, borrowers likely have an established relationship, including with the person who helped originate the loan, and the asset is on the bank’s books.
With a CMBS loan, borrowers are dealing with a master servicer or special servicer who typically had nothing to do with the origination of the loan, he said. The servicer’s fiduciary responsibilities are to its customers, who are the bondholders and the trust, not the borrower.
“We're going to try to do what's best for everybody, and certainly if we can get a win-win solution that makes everybody happy, that's great, but first and foremost we're going to do what's in the best interest of our certificate holder,” he said.
The “loan-to-own” label attributed to CMBS servicers isn’t accurate, Argentic Services Company CEO Andrew Hundertmark said. The bondholders bought bonds, debt or part of a real estate mortgage investment conduit trust that holds loans because they are interested in investing in loans and loan cash flow. If they wanted to buy real estate, they would purchase real estate or invest in a real estate investment trust or some other real estate investment vehicle.
“Really, the last thing generally bondholders want is for us to hold real estate,” he said.
With CMBS loan servicers’ fiduciary duty to maximize recovery for their bondholders, it may at times mean the path with the highest net present value recovery is a foreclosure deed in lieu of moving forward with a sale, he said.
Borrowers don’t have to be in default to start talking with their CMBS loan servicer, said Lindsey Wright, senior managing director, asset management, at Greystone & Co., adding that this has been a myth circulating for a while.
“Borrowers can raise their hand and start talking with these masters,” she said. “We actually recommend that, suggest that they be proactive.”
That would lead to the master servicer getting in contact with the special servicer to discuss the hardship and figure out the best course of action, she said.
Deferments, forbearance and modifications
CMBS loan servicers are drinking from the firehose now, Wright said, adding that her company has been overrun with different types of requests over the last few months.
Hundertmark said they see frustration, fear, anger and uncertainty from the borrowers’ perspective. They come in asking for 90 days forbearance, but they don’t actually know whether 90 days is enough even though they can make up projections that say it is enough.
“In some markets, with certain types of hotels or retail, which is what we’re seeing most of, 90 days is not going to do it,” he said. “Just because you open your doors or the county opens or the state opens, it doesn’t mean people are going to come. That’s what everyone from the lender side and the borrower side is really wrestling with.”
Much of what they’re doing now with forbearances will circle back around and come back to the shop at some point for “another Band-Aid, a better Band-Aid, a longer-lasting Band-Aid,” he said.
Hundertmark agreed borrowers don’t have to go into default or scream to reach out to their master servicer. He said it’s key to get in touch early on and elevate that conversation to the special servicer for a decision to be made, which might mean it needs to come into special servicing for a significant fix or it could be fixed at the master servicer level or borrower level.
Sixty days delinquency will move the loan into special servicing, but his company is working with more than 100 borrowers who are current, 30 days delinquent or 60 days delinquent and have held off on transferring them into special servicing because they’re getting something done outside of that, making it less expensive for both the servicer and the borrower.
Wright said her company has had almost $2 billion transfer into the shop for new COVID-19 related matters, falling into three main categories. The first type of request is more short-term in nature in which borrowers are requesting forbearance for a few months. Borrowers might be using reserves to fund some debt service payments and won’t need to modify any of the terms and will pay back deferments at the end of the period.
The second type, which she expects will be the most numerous, is those who need a more complex, protracted solution, she said. That could mean longer-term forbearance or modifications such as a maturity extension or an interest-only period.
The last category is when the borrower doesn’t want to be part of the solution, she said. This means that they want to hand over the keys or that they won’t put another dollar into the deal, which is when the servicer needs to take further action and pursue its rights as the lender.